How Much Cash Should You Keep In Retirement?

Lightly edited for readability.

Why this question matters

In retirement, there's no paycheck behind your emergency fund anymore, so cash isn't just a rainy-day cushion, it's part of your overall distribution plan. Too little cash creates one set of problems, too much creates another, and San Diego's higher cost of living adds its own wrinkle. Getting the balance right also just makes retirement less stressful.

The danger of too little cash

The biggest risk is sequence-of-returns risk: if the market drops in the early years of retirement and you're forced to sell investments at a loss to fund your spending, that money never gets the chance to recover. Holding enough cash lets you ride out down markets without selling into a loss.

The hidden cost of too much cash

On the other end, moving too much into cash to feel safe ignores that a 30-year retirement means decades of inflation eating into purchasing power. Too much cash means missing out on the growth your portfolio needs to actually last.

A three-layer framework

Everyday cash: one to two months of expenses for regular spending flexibility. Emergency reserve: three to six months of expenses for one-off costs like home repairs or medical bills. Income buffer: a larger reserve you draw from specifically during a market downturn, so you're not forced to sell other accounts while they're down.

The San Diego factor

San Diego's higher cost of living means Social Security covers a smaller share of monthly expenses than it does elsewhere, so more income has to come from portfolio withdrawals, which argues for a somewhat larger cash buffer. Housing and long-term care costs can also shift quickly. On the other hand, San Diego retirees tend to be active and healthy, which often means longer retirements to plan for. And California doesn't tax Social Security, which helps offset some of these pressures.

Where to keep it

High-yield savings accounts and money market accounts are the most flexible options and currently pay competitive interest. Short-term CD ladders can capture a bit more yield on money you know you won't need for six to twelve months. T-bills offer a tax advantage since they're exempt from state tax, though they typically pay somewhat less than other options. The right mix depends on your tax bracket and how soon you'll need the money.

Getting your cash balance right is really the foundation of a confident retirement plan. It's what lets you stay invested for growth in the rest of your portfolio without losing sleep over the next downturn.